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Ronald A. Cuccaro, SPPA
Stephen J. Van Pelt
ADJUSTING TODAY is published as a public service by Adjusters International, Inc. pro- fessional loss consultants. It is provided for general information and is not intended to replace professional insurance, legal and/ or financial advice for specific cases.
...(ISO Form 15 15) listing the gross sales (Gross sales value of production for manufac- turing risks) less outgoing prepaid freight, returns and allowances, discounts, bad debts, and collection expenses, to arrive at net sales or sales value of production, add other earnings from the business, and deduct “cost of goods sold,” certain other allowable expense deductions, and, if “ordinary payroll” expense is either excluded or limited, the uninsured portion of ordinary payroll expense.
Note that for business income “cost of goods sold” differs from the same term in conventional accounting parlance, in that for the insurance there is no deduction for any labor consumed in the process. Each of the items on the report/work sheet is carefully described so that even a lay person not well versed in accounting terminology can, with a little study, figure out how to complete the report/work sheet in a satisfactory manner.
Note also that the availability of year- end figures for business earnings usually lag behind the end of each fiscal year, so it is a good idea to have the annual policy expira- tion or anniversary and the effective date of the Agreed Value Option to also lag perhaps three months behind the end of the fiscal year, to allow time for accurate preparation of the report/work sheet, showing exact fiscal year figures.
Another change in the Business Income Agreed Value Option occurred under the ISO 1995 revision. Previously, the report/work sheet used to determine insurable values became a part of the policy. This provision was eliminated in the 1995 revision. ISO, in its Bulletin describing the many 1995 changes, makes no mention of this change or any reason behind it.
Presumably ISO felt that whether the report/work sheet was or was not a part of the policy had little bearing on the adjustment of any Business Income loss. Unless it could be definitely established that the values shown were deliberately understated no penalty could be assessed, while if deliberately understated, the fraud clause of the policy could be invoked to void the coverage entirely, whether the report/work sheet was or was not considered a part of the policy.
Included on Form 15 15, along with the last fiscal year figures, is an estimate of the figures for the 12 months, beginning not with the start of the current fiscal year, but with the date of the estimate. So with a growing business this difference should be recognized and the numbers adjusted accordingly.
The use of the Agreed Value Option is an excellent tool for insureds to avoid the possible penalty affects of the coinsurance clause in both property and business income insurance.
Great care must be taken in its use, however, to be sure that 1) the values used to set the amount of insurance are reasonably accurate; 2) the new values for the future year are established and the Option extended before its expiration to avoid reapplication of coinsurance; and 3) the amount of insurance actually carried equals or exceeds the amount called for in the Option.